Loews Corporation (NYSE:L) Q4 2021 Earnings Conference Call February 7, 2022 10:00 AM ET

Company Participants

Mary Skafidas - VP, IR and Corporate Communications
James Tisch - President and CEO
David Edelson - SVP and CFO

Conference Call Participants

Operator

Good day, everyone, and welcome to today's Loews Corporation Q4 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions]. Please note this call maybe recorded and I will be standing by should you need any assistance.

It is now my pleasure to turn today’s call over to Mary Skafidas, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Mary Skafidas

Thank you, Ashley, and good morning, everyone. Welcome to the Loews call. A copy of our earnings release, earnings supplement and company overview may be found on our website, loews.com. On this call -- on the call this morning, we have our Chief Executive Officer, Jim Tisch; and our Chief Financial Officer, David Edelson.

Following our prepared remarks this morning, we will have a question-and-answer session with questions from shareholders. Before we begin, however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those made or implied in any forward-looking statements due to a wide range of risks and uncertainties, including those set forth in our SEC filings.

Forward-looking statements reflect circumstances at the time they are made. The company expressly disclaims any obligation to update or revise any forward-looking statements. This disclaimer is only a brief summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC.

During the call today, we might also discuss non-GAAP financial measures. Please refer to our security filings in earnings supplement for reconciliation to the most comparable GAAP measures.

With that, I'd like to turn the call over to Jim. Jim, over to you.

James Tisch

Thank you, Mary, and good morning. Loews had a strong fourth quarter and year with our consolidated subsidiaries making good progress in 2021. What's more, these positive results were achieved in a period marred by the persistence of the COVID-19 pandemic, global supply chain disruptions and the return of inflation. More on inflation later in the Q&A.

Before we talk about the financial performance of our subsidiaries, I'd like to provide an update concerning the ongoing Boardwalk litigation. Many shareholders are familiar with the class action litigation relating to our 2018 acquisition of the minority Master Limited Partnership interest in Boardwalk Pipelines.

In November, the Delaware Court of Chancery issued a decision stating that Loews' breached the Boardwalk partnership agreement, a decision with which we vehemently disagree. The same court then awarded the class of former Boardwalk unitholders approximately $690 million plus interest. Loews has appealed this ruling to the Delaware Supreme Court since we firmly believe that the Chancery Court misapplied the factual underpinnings of the case and misinterpreted the applicable law.

There's a lot more I'd like to say, but on advice of counsel, I'm going to limit myself to this brief statement. Moving on to other happier topics. On today's call, I'd like to focus on the performance of CNA and Loews Hotels. CNA continues to be a success story for Loews, producing record core income of $1.1 billion for the year and no small part due to the company's laser-like focus on underwriting.

CNA's underlying combined ratio decreased by 1.7 points in 2021, driven by the expense ratio. The underlying loss ratio for the year was flat at about 60%. Needless to say, we're pleased with CNA's operational progress. In 2021, CNA benefited from the rate increases resulting in significant premium growth.

The company's P&C gross written premiums increased approximately 10% and net written premiums increased about 5%. As I've mentioned before, the increase in net written premiums is lower than the increase in gross written premiums due to additional reinsurance that the company purchased in its strategy to protect the insurance portfolio from large loss events.

Rate increased more than 9% overall for the year, which is a solid increase. As CNA mentioned on their call earlier today, they expect rate to stay ahead of loss cost trends in 2022. CNA's pretax investment income was up from the prior year due to limited partnerships in common stocks, which increased $258 million. On average, CNA reinvest between $300 million and $400 million a month into its fixed income portfolio. So higher interest rates would improve the portfolio's yield over time.

Additionally, CNA announced a special dividend of $2 per CNA share, up from $0.75 per share in 2021. As a reminder, from 2015 through 2020, CNA paid a $2 special dividend. In 2021, however, the Board reduced the dividend because CNA's earnings were lower due to the effects of the pandemic and other catastrophes.

The return of the $2 special dividend is reflective of CNA's strong earnings performance as well as its financial strength and fortress balance sheet. The company also announced a common dividend of $0.40 per share. These dividends represent the payment of $584 million to Loews in the first quarter of this year.

At Loews Hotels, what a difference a year makes. The company reported adjusted EBITDA of $135 million for 2021, a significant turnaround from the adjusted EBITDA loss of $103 million posted in 2020. Those hotels continue to rebound from the impact of COVID-19 with all hotel properties up and running by the end of the second quarter of 2021. We believe the hotel company will continue to recover from the effects of the pandemic, even though it may be some time before it sees pre-pandemic levels of occupancy.

Loews Hotels has continued to see increased demand for leisure travel as well as improving interest for group travel. For the fourth quarter, owned and joint venture hotels had approximately a 70% occupancy rate, largely in line with the third quarter. However, over that same period, the average daily room rate increased by more than 6%.

The company's resort hotels continue to do considerably better than its urban properties. And happily, nearly 2/3 of Loews Hotels' rooms are in resort destinations. Loews Hotels' distinctive position as an owner and an operator has also played a part in the company's recovery. To illustrate this point, since the beginning of 2019, a year in which the company earned adjusted EBITDA of $227 million, Loews Hotels has added about 3,700 rooms to its system.

However, the pandemic has prevented the company from realizing the full earnings potential of these new rooms, the majority of which are in destinations with built-in demand generators like Orlando. As the pandemic wanes and Loews Hotels continues to grow, its unique role as an owner and operator should continue to accelerate the recovery that the company has already begun to experience.

Before I turn the call over to David, I want to mention share repurchases. In 2021, the company repurchased just over 21 million shares of our common stock for about $1.1 billion, which represents almost 8% of the shares outstanding at the beginning of the year. Each year for the last 4 years, we have spent approximately $1 billion on share repurchases.

Over the last 4 years, we have decreased our shares outstanding by 25%. We feel that share repurchases are a great use of the company's capital aimed at creating value over the medium to long-term for our shareholders. As long as our shares trade below our view of their intrinsic value, we will continue to buy them in.

And with that, let me turn the call over to David.

David Edelson

Thank you, Jim, and good morning, everyone. Today, we reported fourth quarter net income of $343 million or $1.37 per share compared to $397 million or $1.45 per share in last year's fourth quarter. For the full year, we reported net income of $1.58 billion or $6.07 per share, while in 2020, we posted a net loss of $931 million or $3.32 per share.

I will briefly review our fourth quarter results and then turn to the full year. The year-over-year decline in our fourth quarter net income obscured impressive operating improvements at CNA and Boardwalk Pipelines as well as a continued rebound at Loews Hotels. Underwriting results in CNA's core P&C business were outstanding. CNA's pretax underwriting gain rose 13% on the back of an 8% increase in net earned premium and a 50 basis point year-over-year improvement in the combined ratio to 92.9%.

The underlying combined ratio, which excludes catastrophe losses and prior year development, improved 1.4 points to 91.2% in this year's fourth quarter. CNA's consolidated net investment income was basically flat compared to the prior year quarter.

By segment, it was higher in Life & Group and lower in P&C and Corporate. The decline in CNA's year-over-year contribution to our net income was mainly due to lower net investment gains as well as to the Life & Group and Corporate segments. Investment gains were significant in last year's Q4, driven mainly by the mark-to-market on CNA's holdings of nonredeemable preferred stock.

Gains were de minimis this year. In the Life & Group segment, the long-term care block experienced slightly adverse morbidity trends this year after experiencing favorable morbidity last year. And in the Corporate segment, aside from the previously mentioned drop in net investment income, two other factors contributed to the year-over-year decline, a higher noneconomic charge relating to CNA's loss portfolio transfer with National Indemnity and unfavorable net prior year development on legacy master exposures.

The bottom line is that CNA had another strong quarter in its core P&C underwriting business with all its segments, Specialty, Commercial and International, reporting strong premium growth and improved year-over-year underlying combined ratios.

Boardwalk Pipeline's net income contribution declined from $83 million in last year's fourth quarter to $65 million. Last year's Q4 results included $26 million after tax of settlement proceeds related to a customer bankruptcy. Absent this nonrecurring item, Boardwalk's net income contribution increased year-over-year driven by revenue from growth projects recently placed in service and higher system utilization.

Loews Hotels continued its strong rebound, posting net income of $37 million versus a net loss of $68 million in Q4 2020. Please note, however, that net income in the quarter benefited by $26 million from the acceleration of government grant payments used to retire outstanding debt prior to maturity for a recent development project.

Loews Hotels adjusted EBITDA, which excludes unusual items and is defined in our earnings supplement, was $64 million in Q4, up markedly from a $27 million loss in Q4 2020. As you can see on Page 11 of our earnings supplement, occupancy was about double last year's fourth quarter and essentially flat with the third quarter. Average daily rate rose 24% over last year's fourth quarter. And with all hotel properties fully opened during the quarter, available rooms were 44% higher than Q4 2020.

Before turning to the full year, one last observation on the quarterly comparison. The parent company investment portfolio generated less income in the fourth quarter than in the prior year period, driven by lower returns on our holdings of equities and limited partnership investments.

For full year '21, we reported net income of $1.58 billion, a sharp rebound from last year's net loss of $931 million. Excluding the second quarter gain on the deconsolidation of Altium Packaging, our net income for 2021 was $1.14 billion. CNA and Boardwalk posted strong operating results and Loews Hotels experienced a dramatic rebound from 2020's dismal pandemic-induced results.

CNA contributed almost $1.1 billion to our 2021 net income. The core P&C business experienced strong earned premium growth and a combined ratio of 96.2%, almost 4 points better than the prior year. The decline in the combined ratio was driven by a 1.5-point improvement in the expense ratio and lower catastrophe losses. The underlying combined ratio improved 1.7 points to 91.4%.

CNA's net investment income was buoyed by strong returns on limited partnership and common stock investments. Both the P&C and Life & Group segments benefited from these strong returns. Net investment gains also contributed to the year-over-year increase in CNA's net income. The company swung from losses last year to after-tax gains of almost $100 million this year.

The Life & Group segment benefited from good underlying results and an uplift in net investment income driven by LP investments. Additionally, for the year, the segment experienced a $38 million pretax net reserve release versus pretax net reserve charges of $83 million in the prior year. Reserve actions in both years related mostly to the company's long-term care book of business.

CNA's corporate segment showed a year-over-year earnings decline due to several factors, including lower net investment income, a larger noneconomic charge related to CNA's loss portfolio transfer with National Indemnity and higher unfavorable net prior year development on legacy master exposures. CNA ended the year with total assets of $67 billion, a $50 billion investment portfolio, stockholders' equity of $12.8 billion and book value per share of $47.20.

CNA's balance sheet remains rock solid. Its decision to pay a $2 special dividend and raised its regular quarterly dividend by 5% is further evidence of CNA's confidence in its financial position. Boardwalk Pipelines contributed $235 million to our '21 net income, up from $206 million in 2020. Excluding the $26 million customer bankruptcy settlement proceeds received last year, Boardwalk's net income contribution increased $55 million year-over-year.

Boardwalk's EBITDA, which is defined in our earnings supplement, was $843 million in 2021 versus $785 million last year, excluding the settlement proceeds. Boardwalk's year-over-year earnings improvement, excluding the settlement proceeds, was driven by a 6-plus percent increase in net operating revenues against a 4% increase in operating expenses including depreciation and amortization. A reduction in interest expense offset higher depreciation and amortization from growth projects recently placed into service.

Turning to Loews Hotels and its dramatic improvement over 2020. Loews Hotels contributed a pretax loss of $12 million versus a $274 million loss in 2020. Both periods included nonrecurring items, such as impairments, gains on sale and the previously mentioned acceleration of a government grant.

Stripping these out, Loews Hotels' pretax loss declined from $261 million in 2020 to a loss of $44 million in '21. Adjusted EBITDA, which excludes all these nonrecurring items, swung from a loss of $103 million in 2020 to earnings of $135 million in 2021. All properties contributed to this dramatic increase with the Universal Orlando Resort leading the charge.

Loews Hotels business strengthened as the year progressed as measured by occupancy, average daily rate, RevPAR and, of course, adjusted EBITDA. Adjusted EBITDA was negative $13 million in Q1, followed by $25 million in Q2, $59 million in Q3 and $64 million this past quarter.

Turning now to our Corporate segment. Let me unpack the numbers for you. Net investment income increased year-over-year, driven by higher returns on equities and limited partnership investments. Corporate expenses were flat year-over-year with higher interest expense, offset by lower other corporate expenses. Corporate also includes the operating results of Altium, which were consolidated through Q1 '21 and then, once deconsolidated, have been accounted for under the equity method.

Certain nonrecurring items related to the 2021 recapitalization of Altium and the sale of a 47% stake are booked in Corporate as well. Finally, Corporate includes two large unusual items. In 2021, a $438 million after-tax gain on the deconsolidation of Altium Packaging, following our sale of a 47% stake and in 2020, a $957 million after-tax loss on the deconsolidation of Diamond Offshore precipitated by its bankruptcy filing. Our 2020 consolidated results also include a $476 million net operating loss attributable to Diamond Offshore, which represented our share of Diamond results up to the deconsolidation date.

Excluding Diamond's impact on 2020 and the Altium gain in '21, our net income more than doubled from $502 million last year to $1.14 billion in 2021. Now for the parent company. The parent company portfolio of cash and investments stood at $3.45 billion at year-end, with about 77% in cash and equivalents.

During the fourth quarter, we received $194 million in dividends from our subsidiaries, $92 million from CNA and $102 million from Boardwalk, which represented Boardwalk's only dividend to Loews in 2021.

For the full year, we received dividends of $550 million from CNA and $102 million from Boardwalk and a $199 million dividend from Altium as part of its recapitalization. We also received net pretax proceeds of $411 million upon the sale of a 47% stake in Altium. Based on today's CNA dividend declarations, Loews will receive a total of $584 million in special and regular dividends from CNA this quarter.

We’ve repurchased 5.4 million shares in the fourth quarter for $306 million and 21 million shares during all of '21 for $1.13 billion. Since year-end, our share repurchase activity has been negligible.

I will now hand the call back to Mary. Thank you.

Question-and-Answer Session

A - Mary Skafidas

Great. Thank you, David. We are going to move on to the Q&A portion of the call. We have a number of questions from shareholders. The first question is for Jim. Jim, can you please give us more color on your view of share repurchases?

James Tisch

I sure can. Loews a long-established policy of share repurchases represents a key element of our capital allocation strategy. In 2021, we bought back 21.1 million shares of Loews common stock for a total of $1.1 billion, which was the equivalent of almost 8% of the shares outstanding at the start of the year.

During the 10-year period for January of 2012 through December of 2021, Loews has spent $6.8 billion on repurchases, retiring about 37% of our common shares outstanding at the beginning of 2012. Stated another way, 10 years ago, we had about 60% more shares outstanding than we do today. In certain political circle, share buybacks have come under fire, especially over the last few months.

It is our strong belief that restricting the company's ability to repurchase their shares would be detrimental to all investors. Stock repurchases benefit investors, promote efficient capital allocation and significantly reduce volatility in the market. The market stabilization, the results from allowing companies to buy back their shares benefits all shareholders, including retail investors. Capital that flows to shareholders from these repurchases may be reinvested, not just in S&P 500 companies, but rather in companies of all shapes and sizes.

We believe actions that limit or restrict allocation of capital, either through regulation or by tax will have a negative effect on stock market valuations.

Mary Skafidas

Thank you, Jim. Next question has to do with Boardwalk. Over the past several years, there has been an increased focus on the importance of reducing methane emissions, both by regulators and by the public. Can you please share with us what Boardwalk has done to reduce their emissions?

James Tisch

Sure. Boardwalk is focused on reducing methane emissions from its natural gas pipeline system, not only because it's the right thing to do for the environment, but also because we believe it's the right thing to do for Boardwalk's business. Boardwalk has been focused on meeting and in certain cases, exceeding regulatory obligations by reducing emissions from its pipeline and storage assets. In 2020, Boardwalk achieved about a 30% year-over-year reduction in methane emissions at certain key sites.

Boardwalk is also an active member of a coalition whose goal is to lower methane emissions by 2025 to less than 1% of total natural gas produced nationwide. Boardwalk uses a number of strategies to reduce their methane emissions. These strategies include replacing older compression equipment as appropriate with low-emission -- low-emission fuel-efficient units, modifying older fuel systems as necessary on certain reciprocating compression equipment to lower fuel consumption and emissions, and conducting emission surveys and performing maintenance and repairs on identified component leaks. Reducing methane emissions is and will remain a priority for Boardwalk.

Mary Skafidas

Great. Thank you, Jim. The next question has to do with how Loews computes the value with non-publicly traded assets, specifically for its hotel business and its interest in Altium?

James Tisch

So we look at a number of factors when determining intrinsic value, including industry outlook, our subsidiary's growth potential, operational efficiency and management. When evaluating the industry outlook, we consider cyclical opportunities and risks, potential for technological disruption and how the subsidiary is positioned compared to its peers.

When looking at growth potential, we evaluate both organic and inorganic growth opportunities. And consider whether or not the subsidiary can self-fund those opportunities. In terms of operational efficiency, we analyze potential opportunities for improvements and the role of technology in driving efficiency.

Our assessment of the die of our subsidiaries is not static, but rather is adjusted as markets and circumstances change. Each subsidiary have metrics that are specific to this industry. For example, one important metric for Loews Hotels is adjusted EBITDA, which we believe is more meaningful to the lodging industry than net income. Keep in mind, however, that in the last full year of non-pandemic affected operations for our hotels in 2019. Since then, Loews Hotels has added about 3,700 rooms and the full earnings potential of these rooms have yet to be realized.

We believe that in 2022, Loews hotels will continue to recover from the effects of the pandemic, but it's still uncertain when occupancy rates will return to pre-pandemic levels.

In terms of Altium Packaging, we don't make a lot of information public. Instead, we report Altium as part of the Corporate segment. Altium does not have a material impact on Loews, not only due to the size of the company, but also as a result of our reduced stake since the sale of 47% of this subsidiary. However, we continue to believe in the long-term growth potential of the business.

Mary Skafidas

Great. Thank you, Jim. Next question, some of our shareholders are starting to call the desert of our earnings call, which has to do with inflation. So Jim, for the past three quarters, you have ended our earnings conference call with your views on inflation interest rate. Can you please update us on these topics?

James Tisch

Mary, I'd be delighted to give you my rant. First, let me recap my comments over the last year. On the earnings call for the first quarter of 2021, I spoke about the nascent cost push and demand pull inflation that was going to be brought about by the easy monetary policy and big deficit spending. For the second quarter, I spoke about the cycle of inflation that was developing along with growing labor shortages.

On the third quarter call, I spoke about the wage price spiral and how interest rates were too damn low. At the time, the inflation rate was 5.4%, and that said, still have their head in the sand with respect to the almost 0% Fed funds rate and their monthly $120 billion purchase of federal and mortgage securities. So here we are on the fourth quarter call and the Fed has finally woken up to the problem that they should have foreseen a year ago.

The problem now is that the Fed is taking its sweet time putting in place their action plan to deal with the sky rocketing inflation and the overheating economy. Instead of doing something about the 7% year-over-year increase in the CPI, the Fed is only talking about it. And the Fed has led the market to perceive that they will raise Fed funds rates four times in the course of this year. That's 100 basis points this year, meaning that at this pace, it will take them seven years to get Fed funds to the current level of inflation. While I don't think that inflation will stay at the 7% level, I do believe that with our quicker and more decisive action by the Fed, it will be seen that they are fighting a forest fire with a water pistol.

As long as interest rates are below the inflation rate, the proverbial punch bowl is still there for all market participants to grab a drink. I understand that the Fed doesn't want to cause a panic and that they have to be careful about what they say. But still, there's something to be said for acknowledging the scope of problem and beginning the process of interest rate normalization.

For example, the Fed is still executing its policy of quantitative easing by purchasing government and mortgage securities. As they say, when you're in a hole, the first thing to do is to stop digging. The Fed is still digging. The good news is that it seems that additional fiscal stimulus is off the table, at least for the time being. The last thing about this overheating economy and the Fed needs is more federal government deficit spending.

Hopefully, fiscal stimulus will stay off the table. As it stands now, federal spending will be down this year compared to last year. But much of the federal money that was allocated last year is just now beginning to be spent. State coffers are now overflowing with a federal largest, which will be spent over the coming quarters. And the consumer is still flushed with liquidity from their savings being over the past two years.

So I'm not worried about the economy slowing down due to a lack of real final demand. For 2022, I foresee an economy that will continue growing with short-term interest rates that will begin their slow rise as the quarterly 25 basis point increases in Fed funds start to accumulate.

Inflation will continue to be a major issue as we will still have the dual problems of cost push and demand pull inflation. My guess is that unless the Fed moves quicker, we can expect inflation to stay at elevated levels for this year and likely next. As for fixed income securities, my view is that even though the government 10-year notes are up 80 basis points in yield in the past year, they are still more than 500 basis points below the year-over-year CPI increase. And there are 120 basis points below where they were as little as three years ago when inflation was 2%.

There's lots more room for the 10-year notes to go up in yield, and my guess is that the longer it is seen that the Fed isn't serious about controlling inflation, the higher the ultimate peak in 10-year notes will be.

In forecasting out a year, I wouldn't be surprised to see 10-year notes yielding between 2.5% and 3% at the end of this year. So that's it from our economic ramping forecast, Stay tuned next quarter for another quarterly economic update.

Mary Skafidas

Great. That concludes the Loews call for today. As always, thank you, Jim. Thank you, David, and thanks to all of you for your continued interest. Please feel free to reach out to me with any additional questions at mskafidas@loews.com. A replay will be available on our website, loews.com, in approximately two hours. You may now disconnect.

Operator

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.